Posts Tagged ‘FTB’

Hyatt Decision a Win for FTB as Far as Damages, but Decision Upheld that FTB Committed Fraud

Thursday, September 18th, 2014

The Nevada Supreme Court released its decision today in Franchise Tax Board of California v. Hyatt. The decision is definitely a win for the FTB as far as damages; however, the Court upheld that the FTB committed fraud against Mr. Hyatt and the damage award for fraud. Overall, some portions of the District Court decision were reversed, other portions were upheld, and still other portions were remanded for more proceedings.

First, for those who want to read more than the summary I’m going to present, I strongly recommend reading the opinion. It’s quite readable though long (it runs 68 pages). That it runs this long for a unanimous decision just goes to show how lengthy this litigation has been.

As for the decision:
1. The Court upheld that the FTB is not immune to lawsuits for intentional torts and bad-faith conduct. Thus, Mr. Hyatt’s lawsuit has basis in law.

2. Most of Mr. Hyatt’s claims fail, though, as a matter of law. There are two exceptions: fraud and intentional infliction of emotional distress (IIED). Those claims are valid as far as law per the Nevada Supreme Court.

3. The Court upheld the jury’s finding that the FTB made false representation to Mr. Hyatt, and upholds the award of $1,085,281.56 of damages.

4. The Court upheld the jury’s finding that the FTB committed IIED. However, the damages were not upheld. This has been remanded back to the District Court for a new trial on the amount of damages committed against Mr. Hyatt.

5. The Court ruled that “Because punitive damages would not be available against a Nevada government entity, we hold, under comity principles, that FTB is immune from punitive damages.” This is a huge win for the FTB, as $250 million of punitive damages were awarded at trial.

6. The FTB should look at this result and realize the egg on their face…but probably won’t.


1. The Court gives an excellent history of the case, and its winding road to the US Supreme Court and back to the District Court for trial. There are still more trials to come besides the remand proceedings. Mr. Hyatt’s appeal of the FTB’s rulings against him has still not been heard in California. Additionally, Mr. Hyatt sued the FTB in federal district court in Sacramento alleging that the FTB has deprived him of his constitutional rights.

The FTB first again challenged whether or not Mr. Hyatt could sue the FTB. There is a legal principle called “comity.” Generally, under comity, “…[A] forum state may give effect to the laws and judicial decisions of another state based in part on deference and respect for the other state, but only so long as the other state’s laws are not contrary to the policies of the forum state.” The FTB loses here:

Because we conclude that discretionary-function immunity under NRS 41.032 does not include intentional torts and bad-faith conduct, a Nevada government agency would not receIve immunity under these circumstances, and thus, we do not extend such immunity to FTB under comity principles, as to do so would be contrary to the policy of this state.

2. The Court then looked at the torts that Mr. Hyatt alleged the FTB committed. “Hyatt brought three invasion of privacy causes of action-intrusion upon seclusion, publicity of private facts, and false light-and additional causes of action for breach of confidential relationship, abuse of process, fraud, and intentional infliction of emotional distress.”

Mr. Hyatt loses the intrusion upon seclusion and publicity of private facts because the facts that the FTB released (his personal confidential information including his social security number) were in the public domain previously.

The FTB next challenges whether there is a “false light” tort. The Nevada Supreme Court says that there is such a tort. The FTB also appeals arguing that Mr. Hyatt did not present any evidence that anyone thought he was a ‘tax cheat’ based on the litigation list published by the FTB or the FTB’s third-party contacts.

The record before us reveals that no evidence presented by Hyatt in the underlying suit supported the jury’s conclusion that FTB portrayed Hyatt in a false light. Because Hyatt has failed to establish a false light claim, we reverse the district court’s judgment on this claim. [citation omitted]

The FTB argues that there cannot be a breach of a confidential relationship because there was no such relationship. The Court looked at what causes a confidential relationship as far as a tort.

But in conducting the audits, FTB was not required to act with Hyatt’s interests in mind; rather, it had a duty to proceed on behalf of the state of California’s interest. Moreover, the parties’ relationship was not akin to a family or business relationship. Hyatt argues for a broad range of relationships that can meet the requirement under Perry, but we reject this contention. Perry does not provide for so expansive a relationship as Hyatt asks us to recognize as sufficient to establish a claim for a breach of confidential relationship. Thus, FTB and Hyatt’s relationship cannot form the basis for a breach of a confidential relationship cause of action, and this cause of action fails as a matter of law. The district court judgment in Hyatt’s favor on this claim is reversed. [citations and footnotes omitted]

The FTB then challenges the abuse of process tort. The FTB asserted that there can’t be abuse of process as the FTB did not use the judicial process. The Court agreed:

Because FTB did not use any legal enforcement process, such as filing a court action, in relation to its demands for information or otherwise during the audits, Hyatt cannot meet the requirements for establishing an abuse of process claim.

3. The next tort was fraud. “To prove a fraud claim, the plaintiff must show that the defendant made a false representation that the defendant knew or believed was false, that the defendant intended to persuade the plaintiff to act or not act based on the representation, and that the plaintiff had reason to rely on the representation and suffered damages.”

The FTB argued that its statements to Mr. Hyatt that it would provide him with “courteous treatment” and keep his information confidential weren’t sufficient basis for a fraud claim, and even if that was sufficient there wasn’t any evidence that such representations were false when made. On the other hand, Mr. Hyatt claims that the FTB misrepresented their promises.

Here, the Court ruled in favor of Mr. Hyatt.

The record before us shows that a reasonable mind could conclude that FTB made specific representations to Hyatt that it intended for Hyatt to rely on, but which it did not intend to fully meet. FTB represented to Hyatt that it would protect his confidential information and treat him courteously. At trial, Hyatt presented evidence that FTB disclosed his social security number and home address to numerous people and entities and that FTB revealed to third parties that Hyatt was being audited.

There’s more here, and I’ll get to this in my views (below, in #6).

The FTB then argued that there should be a limit on the damages based on fraud (based on the FTB being immune from fraud in California and there being certain limits in Nevada), while Mr. Hyatt argues that the FTB isn’t entitled to any caps on damages. The Court agreed with Mr. Hyatt:

This state’s policy interest in providing adequate redress to Nevada citizens is paramount to providing FTB a statutory cap on damages under comity. Therefore, as we conclude that allowing FTB a statutory cap would violate this state’s public policy in this area, comity does not require this court to grant FTB such relief. As this is the only argument FTB raised in regard to the special damages awarded under the fraud cause of action, we affirm the amount of damages awarded for fraud. [citation omitted]

4. The court then looked at intentional infliction of emotional distress (IIED). The FTB argued that because Mr. Hyatt didn’t provide any medical evidence, he can’t claim IIED. Mr. Hyatt disagreed, and that given that he was severely harmed that the proof level can be less than medical records. The Court agreed with Mr. Hyatt, and that this case was on the more extreme end of the scale:

As explained above in discussing the fraud claim, FTB disclosed personal information that it promised to keep confidential and delayed resolution of Hyatt’s protests for 11 years, resulting in a daily interest charge of $8,000. Further, Hyatt presented testimony that the auditor who conducted the majority of his two audits made disparaging remarks about Hyatt and his religion, was determined to impose tax assessments against him, and that FTB fostered an environment in which the imposition of tax assessments was the objective whenever an audit was undertaken…

In support of his lIED claim, Hyatt presented testimony from three different people as to the how the treatment from FTB caused Hyatt emotional distress and physically affected him. This included testimony of how Hyatt’s mood changed dramatically, that he became distant and much less involved in various activities, started drinking heavily, suffered severe migraines and had stomach problems, and became obsessed with the legal issues involving FTB. We conclude that this evidence, in connection with the severe treatment experienced by Hyatt, provided sufficient evidence from which a jury could reasonably determine that Hyatt suffered severe emotional distress.

However, the damage award for this claim was not upheld, and the Court remanded the case back to the District Court for a new trial on the damages. The Court concluded that there was evidentiary and jury instruction errors.

5. The FTB appealed whether punitive damages are allowed. “FTB argues that it is entitled to immunity from punitive damages based on comity because, like Nevada, California law has expressly waived such damages against its government entities. California law provides full immunity from punitive damages for its government agencies.” The Court finds that comity warrants that the FTB be immune from punitive damages:

The broad allowance for punitive damages under NRS 42.005 does not authorize punitive damages against a government entity. Further, under comity principles, we afford FTB the protections of California immunity to the same degree as we would provide immunity to a Nevada government entity as outlined in NRS 41.035(1). Thus, Hyatt’s argument that Nevada law provides for the award of punitive damages against FTB is unpersuasive. Because punitive damages would not be available against a Nevada government entity, we hold that under comity principles FTB is immune from punitive damages. We therefore reverse the portion of the district court’s judgment awarding punitive damages against FTB.


6. My thoughts: If I as a tax professional were to conduct myself in the manner that the FTB did, I would almost certainly be liable for truckloads of damages and would lose my license. Consider that the Nevada Supreme Court called the conduct of the FTB “extreme.” Consider also that at trial the FTB called its conduct typical:

Tax agents rummaged through his trash without warrants, visited business partners and doctors, and shared his Social Security Number and other personal information with the media. This is outrageous behavior and I call on the FTB to rein in their agents. What really galled me is the FTB testified in open court that this level of harassment was only a typical audit. If true, then the stormtroopers are alive and well at the FTB.

The author of the above quote, Bill Leonard, knows what he’s talking about. He’s a former member of the California Board of Equalization, the California tax agency which hears appeals from the FTB. There really isn’t much to add to that description. But let me include the entire text of what the Nevada Supreme Court wrote in affirming that the FTB committed fraud:

The record before us shows that a reasonable mind could conclude that FTB made specific representations to Hyatt that it intended for Hyatt to rely on, but which it did not intend to fully meet. FTB represented to Hyatt that it would protect his confidential information and treat him courteously. At trial, Hyatt presented evidence that FTB disclosed his social security number and home address to numerous people and entities and that FTB revealed to third parties that Hyatt was being audited. In addition, FTB sent letters concerning the 1991 audit to several doctors with the same last name, based on its belief that one of those doctors provided Hyatt treatment, but without first determining which doctor actually treated Hyatt before sending the correspondence. Furthermore, Hyatt showed that FTB took 11 years to resolve Hyatt’s protests of the two audits. Hyatt alleged that this delay resulted in $8,000 in interest per day accruing against him for the outstanding taxes owed to California. Also at trial, Hyatt presented evidence through Candace Les, a former FTB auditor and friend of the main auditor on Hyatt’s audit, Sheila Cox, that Cox had made disparaging comments about Hyatt and his religion, that Cox essentially was intent on imposing an assessment against Hyatt, and that FTB promoted a culture in which tax assessments were the end goal whenever an audit was undertaken. Hyatt also testified that he would not have hired legal and accounting professionals to assist in the audits had he known how he would be treated. Moreover, Hyatt stated that he incurred substantial costs that he would not otherwise have incurred by paying for professional representatives to assist him during the audits.

The only solution to such behavior by tax agencies is the “what’s good for the goose is good for the gander rule.” If a tax agency (or its employees) commits fraud against a taxpayer, the tax agency should be held liable. I urge California voters to rescind the blanket liability protection that tax agencies have. The actions of the FTB show it’s not warranted.

For Mr. Hyatt, the case will head back to Las Vegas for another trial (most likely next year) followed by, almost certainly, another appeal.

Sometimes, Pigs Do Fly (California Repeals FTB’s QSB Tax Grab)

Sunday, October 6th, 2013

I look out the window of my office, and I saw the pig that flies:

A flying pig?

[The Flying Pig is via a Creative Commons license, from Wikipedia. And, no, I didn't see one flying by my office in Las Vegas.]

California Governor Jerry Brown signed legislation “repealing” the Franchise Tax Board’s grab of revenue via the QSB decision. For those who don’t remember, last year a court ruled that California couldn’t discriminate against owners of Qualified Small Business Stock who reinvested the proceeds in a non-California company. So the Franchise Tax Board had ruled that anyone who did this would be subject to back taxes on the proceeds of their QSB stock. It was a decision that had California’s tech community in an uproar.

Kudos to Governor Jerry Brown who officially put the end to the FTB’s tax grab. He signed legislation that through legislation states that entrepreneurs and others who followed the law do not have to pay back taxes, penalties, and interest to California.

So pigs did fly in Sacramento…at least for one day.

When a Day Late Isn’t a Dollar Short

Tuesday, April 16th, 2013

I’m in zombie mode — it’s midnight and the last of the work is done (for a short time). I’ll be out the rest of today (Tuesday). Tax Day is over.

One place where it’s sort of not over is California. The Franchise Tax Board had major computer issues with their website on Monday. The FTB announced that anyone who pays their tax on April 16th via the FTB’s webpay system (for individuals or for businesses) on April 16th will be considered to have made the payments on April 15th.

News From California Regarding QSBS

Thursday, February 28th, 2013

Two pieces of news out of California regarding the Qualified Small Business Stock situation. For those who aren’t aware, a court last year ruled that California couldn’t discriminate against out-of-state Qualified Small Business Stock (QSB). The Franchise Tax Board interpreted that ruling to mean that for any open tax year, the state would challenge the QSB deductions for anyone who took it. For 2012 on, the California deduction was eliminated, so this is an issue impacting entrepreneurs for tax years 2008 through 2011.

The FTB announced today that they will begin sending Notices of Proposed Assessment (NPAs) in early April. The FTB has also established a simplified procedure to protest the NPAs and it’s clearly noted in their FAQ web page on this issue.

(As much as I think the FTB’s implementation of the Cutter decision is wrong, I want to give the FTB kudos to them for an easily understood webpage and instructions on this issue. I also want to thank them, especially Susan Maples (the FTB’s Tax Practitioner Liaison), for reaching out to the tax professional community in communicating the issues.)

Meanwhile, the tech community remains extremely displeased with the FTB’s actions. Brian Overstreet, the man who began sounding the alarm, has set up a new website on this issue. There’s a very anti-California article on Forbes.com that highlights this issue. Legal action is almost a certainty; many of these entrepreneurs have the deep pockets necessary to fight the FTB.

Important Court Ruling for Entities Owned by Californians Located Outside of California

Thursday, February 28th, 2013

Let’s say you have a business entity, Widgets, Inc. It’s a Nevada corporation; the corporation is located in Las Vegas. The business has no operations in California but it is a corporation with one owner who resides in California. However, the owner is not involved with day-to-day business; a manager in Las Vegas runs the business. The only officer of the corporation is a Nevadan, too. Does the corporation owe California taxes?

The Franchise Tax Board has said yes for years. Any business entity which is owned by a Californian is subject to California taxation. Earlier this month a court in Los Angeles said no.

As reported in Forbes, the facts weren’t in dispute, and mirror what I wrote above. Since all the evidence showed the company was in Nevada, run by Nevadans, Nevada was the commercial domicile of the company, not California. The company won.

Now, let’s get to the dark side of the case. The article in Forbes doesn’t mention the years in dispute. Unfortunately, the actual ruling does not appear to be available on the Internet. But I did find a predecessor ruling from the Board of Equalization that’s available. Let’s go through the hoops that Daniel V (the corporation in question) went through. From reading the BOE decision, I found that the years in dispute were 1997 and 1998.

Sometime after 1997 and 1998, the Franchise Tax Board sent notices to the company. The company then fought the notices through the FTB’s appeal process. (The dates on this aren’t available.) After losing at the FTB, the company paid some (probably most) of the taxes and penalties, and filed an appeal to the Board of Equalization. (The Board of Equalization hears appeals from the FTB.) The company lost in May 2008, paid the remaining taxes, penalties, and interest, and asked for a rehearing (that’s what I linked to above). That rehearing happened later (probably in late 2008), and the company lost again (the decision was likely not rendered until 2011). The entity then sued in Superior Court (March of 2011). The case was heard in November 2012. The company won…for now. I fully expect the FTB to appeal the decision (though there are reasons not to).

Consider also the FTB’s mentality. This case did go through the FTB appeals process, and the company lost. As far as the FTB is concerned, any business that can be loosely tied to California owes California taxes…period. The facts of this case definitely make one wonder about how the company lost at both the FTB and BOE. But I digress….

I expect an appeal because the FTB’s litigation strategy has been to appeal almost every case, whether they’re in the right or the wrong (see Gilbert Hyatt). Part of this is the FTB’s litigation strategy: To exhaust individuals thinking of suing the agency. It takes a lot of time and money to sue the FTB.

One reason not to appeal is because this case only stands as precedent for the one company involved. If the FTB appeals and loses, then this case is binding upon the FTB (to all businesses with a similar set of facts).

Finally, consider how long this case has festered. It’s been ten years (at least) and it’s likely still not done. It does take a lot of money to fight the FTB.

Entrepreneur Rant on FTB’s Retroactive QSB Ruling

Tuesday, January 15th, 2013

Back in December, I reported on how the Franchise Tax Board (California’s income tax agency) would interpret the Cutter decision. I didn’t spend much time on it, as the subject of Qualified Small Business stock (QSB) doesn’t impact many of my blog readers. The FTB decided that since the appellate court ruled as aspect of California’s law on sale of QSB stock unconstitutional, one way around the issue was to void the law in its entirety. And send individuals who took the QSB deduction penalty and interest notices. Surprise!

That said, an entrepreneur named Brian Overstreet has written a column that is about as nasty as can be toward the FTB and California. (I recommend reading the entire column.) As Mr. Overstreet notes the impact:

1. If you are a business founder or early investor who sold stock since 2008 and took the QSB exclusion: Surprise! You are going to get a bill from the FTB for the 50 percent of the taxes you excluded plus interest plus possible penalties.

2. If you are a business founder or early investor and have not yet sold stock: Rethink your business and tax planning strategies. Consider whether it’s fiscally prudent to stay in California.

3. If you a contemplating starting or investing in a California business: Think long and hard. Consider out-of-state alternatives.

Of course, there’s definitely a constitutional issue here, too. Given that some of the impacted entrepreneurs have deep pockets, I expect this ruling to head to court. I suspect the FTB can do this for the current tax year (2012; the ruling was announced in December) but I doubt it will hold up for prior tax years.

The other issue is one any entrepreneur in California should consider. As Mr. Overstreet noted, “Why in the world would any smart business person start or invest in a new California company facing that kind of penalty?”

FTB and BOE Release List of 500 Biggest Tax Delinquents

Thursday, October 18th, 2012

California’s Franchise Tax Board released its list of the 500 largest income tax delinquents on Tuesday. New to the list is a notation of whether or not the individuals have state licenses. I’m amazed at how many attorneys are on the list. Lawyers, after all, are one of three groups of professionals with full practice rights in front of the IRS. That doesn’t seem to help them here. But I digress….

Leading the list is Halsey Minor, founder of CNET. He filed bankruptcy earlier this year. He’s been on the list for a while, and given the bankruptcy, he’ll likely be on it for some time. He owes the FTB $10.7 million.

There are some celebrities on the list: Dionne Warwick ($2.6 million), Joseph Francis ($819,000), and Steven Seagal ($348,000) were highlighted by Joe Kristan. I also noticed Ronald Isley ($407,000) among the individuals.

Joseph Francis makes a second appearance on the list. His Mantra Films owes $1.2 million (the FTB added officers to the list for business entities which made it easy for me to spot this). In total, Mr. Francis and his businesses owe the FTB more than $2 million.

It took $140,000 in tax debt to make the FTB list.


The Board of Equalization also released its list of the 500 largest sales and use tax delinquents. Leading the list (again) is California Target Enterprises of Downey (owing $18.5 million). The company went bankrupt in 1992, so like Mr. Minor, good luck to the BOE in getting anything from them.

The only celebrity I recognize on the list is Bruce McNall, the former owner of the Los Angeles Kings and former resident of ClubFed (he was convicted of conspiracy and fraud back in the 1990s). Mr. McNall owes $7.8 million to the BOE, and it’s likely that collecting from his will be nearly as difficult as collecting from California Target Enterprises.

It took $436,000 to make the BOE list.

California Doesn’t Conform on Self-Employment Tax Deduction Change

Sunday, March 4th, 2012

Yet another California non-conformity issue has reared its head. Those of us who are self-employed must pay self-employment tax on their self-employment earnings. The self-employed get to deduct 50% of that on line 27 of Form 1040.

In 2011 the self-employment tax changed from 15.3% to 13.3% on the first $106,800. However, the deduction is still based on 15.3% rather than 13.3%. So let’s say I paid $1,000 in self-employment tax; my deduction is $575, not $500. A little extra benefit…except on your California return.

For California purposes, the deduction is $500, not $575–it remains at 50% of the amount paid in self-employment tax. I noticed this with one of my California clients and called the FTB to verify this. The California legislature did not pass conforming legislation. Those of you who are self-employed Californians will see an adjustment on Schedule CA of your Form 540.

This was noted in today’s San Francisco Chronicle
. The Chronicle also noted that TurboTax hadn’t updated its software until last Friday. Apparently, the Franchise Tax Board forgot this adjustment until after the tax forms were initially generated.

Those of you who have filed returns with “material” changes will likely get notices noting the adjustment and proposing an additional amount of tax to pay.

The FTB Would Like Some Help from California Tax Professionals

Thursday, July 28th, 2011

If you’re a tax professional in California, the Franchise Tax Board is asking for some help to improve their website.

We need tax professionals’ help to test webpages and online applications (such as MyFTB Account) and provide feedback to us. If you elect to help us, here’s what to expect:
• Testing generally takes 15 to 30 minutes.
• Sessions vary based on what we test.
• We contact you by email or phone and provide you information about the test.
• We plan to contact you only once or twice a year.
• We will not contact you during April or October.
If you would like to participate or have additional questions, respond to Donna Freeman with the following information at Donna [dot] Freeman [at] ftb.ca.gov:

Your name
Your email address
Your daytime phone
Your city

We appreciate your help!

It’s too every tax professional’s benefit to have the FTB website work well, so those of you who have a little extra time (and remember, the FTB will not contact you during April or October) should send Ms. Freeman an email.

At Least, He’s Doing Well…

Tuesday, April 20th, 2010

Who is Halsey Minor? He happens to top the California Franchise Tax Board’s semi-annual listing of tax delinquents. I may not have heard of Mr. Minor, but many others have; he is the founder of CNET. Mr. Minor told c-ville.com that the tax debt owed to California–$13,120,479.39–is accurate. Mr. Minor blames Merrill Lynch for his problems. “I am not sure how many people have made $130 million over the last several years. It also proves the difficulties Merrill has created, all of which will be tried in front of a jury in California [on] January 25, 2011.”

There are other interesting names on the list. Coming in at #6 with a tax debt of $5,184,641.51 is former major league baseball player Kevin Mitchell. And then well down the list with a tax debt of $493,144.68 is Pamela Anderson. Yes, that Pamela Anderson.

I must report, though, that OJ Simpson is no longer on the list. Apparently, being in prison in Nevada is a good excuse for not paying the FTB.

It took a tax debt of $290,964.78 to make the list.